UK: Budget 2011 - Implications For The Investment Funds Sector

Last Updated: 1 April 2011
Article by Amanda Solomon

Modernisation of Investment Trust Companies ("ITCs")

Following previous consultation, the Finance Bill 2011 (the "Finance Bill") will include provisions modernising the tax rules for ITCs. The new ITC tax rules will:

  • include a new definition of an investment trust;
  • provide certainty on which transactions are treated as investments for tax purposes (this will include a "white list" of transactions);
  • permit a wider range of investment strategies;
  • reduce administrative burdens, including removal of the annual approval process; and
  • deal more flexibly with minor or inadvertent breaches of the rules.

Draft regulations for the new ITC regime will be published for consultation during April 2011.

UCITS Funds with UK Resident Fund Manager

With effect from the Royal Assent of the Finance Bill (expected in July 2011), undertakings for collective investment in transferable securities (UCITS) funds will not be treated as resident in the UK in cases where they otherwise might be UK resident by virtue of having a UK resident fund manager.

Tax Transparent Funds

In June 2011, the Government will consult concerning the establishment of a tax transparent fund vehicle to support the competitiveness of the UK fund industry following European regulatory changes in the Undertakings for Collective Investment in Transferable Securities (UCITS IV) Directive 2009/65/EC. It is intended that legislation be included in the Finance Bill 2012.

Enterprise Investment Scheme ("EIS") and Venture Capital Trusts ("VCTs")

As previously announced, for shares issued on or after 6 April 2011, the requirement that more than 50% of the qualifying trade must be carried on in the UK will be replaced with a requirement that the investee company has a permanent establishment in the UK.

Subject to State Aid approval, the rate of income tax relief given under the EIS will increase from 20% to 30% with effect from 6 April 2011. It should also be noted that any carry back of relief from 2011/12 to 2010/11 will only qualify for 20% relief.

Subject to State Aid approval, the following further significant changes will be made to both the EIS and VCTs rules with effect from 6 April 2012:

  • the conditions for an investee company to be a qualifying company will be relaxed:
    • the upper limit on the number of employees of the investee company will increase from 50 to 250 employees;
    • the upper limit on the level of gross assets immediately before the investment will increase from £7 million to £15 million (and the limit on the amount post-investment will be abolished);
  • the maximum amount that can be invested through both EIS and VCTs in an individual company will be increased from £2 million to £10 million; and
  • the annual amount that an individual can invest through an EIS will increase from £500,000 to £1 million.

The Government will consult on further changes to the schemes including proposals to give additional support through the EIS for seed investment.

Companies whose trade consists wholly or substantially of the receipt of feed-in tariffs (FITs) or similar subsidies will only be eligible for the two schemes where commercial electricity generation commences before 6 April 2012. However, shares issued before 23 March 2011 will not be affected.

Real Estate Investment Trusts ("REITs")

The Government will consult shortly about reducing barriers to entry and investment and reducing the regulatory burden for existing and future REITs with the intention of including legislation in the Finance Bill 2012.

Matters to be covered by the consultation will include:

  • abolishing the 2% conversion charge for companies joining the REIT regime;
  • relaxing the requirement for a UK REIT to be listed on a recognised stock exchange, which will encourage entry into the REITs regime, especially for start-up property investment companies (this would permit listing on AIM);
  • a diverse ownership rule for institutional investors which will enable them to set up UK REITs;
  • a fixed grace period for new REITs to meet the non close company requirement, which will enable start up UK REITs to build a sufficient reputation to attract shareholders; and
  • allowing cash to be a "good" asset for the purpose of the REIT balance of business asset test, which will allow UK REITs to make investment decisions on a commercial basis.

Reduction in Stamp Duty Land Tax ("SDLT") for multiple purchases of Residential Properties

In respect of property acquisitions whose effective date is on or after the date of the Royal Assent of the Finance Bill (expected in July 2011), a new SDLT relief will be available to purchasers of two or more residential properties. In particular, when the relief is claimed, the rate of SDLT will be computed by reference to the average consideration for each dwelling (instead of the total consideration), subject to a minimum rate of 1%.

This change is intended to strengthen demand for, and reduce a barrier to investment in, residential property.

Reform of Stamp Duty Reserve Tax ("SDRT") on Collective Investments Schemes

As previously announced, with effect from (or just after) the Royal Assent of the Finance Bill (expected in July 2011) there will be an expansion of the relief from the Schedule 19 SDRT charge for investments in certain underlying collective investment schemes.

UK Investments by Non-Domiciles

Changes will be made to the tax rules for non-domiciles with effect from April 2012:

  • no tax charge will arise when non-domiciles remit foreign income or capital gains to the UK for the purpose of commercial investment in UK businesses (currently, a tax charge arises in these circumstances which is a disincentive to inward investment to the UK);
  • the existing £30,000 annual charge will be increased to £50,000 for non-domiciles who have been UK resident for 12 or more years and who wish to retain the benefit of the remittance basis (the £30,000 charge will be retained for those who have been resident for at least seven of the past nine years and fewer than 12 years); and
  • simplification of the rules to remove administrative burdens.

It is expected that there will be a consultation document on these measures in June 2011. The Government has also confirmed that there will be no other substantive changes to the non-domiciles tax rules for the remainder of the current Parliament.

Capital Gains Tax Entrepreneurs' Relief doubled

With effect from 6 April 2011, the lifetime limit on capital gains qualifying for entrepreneurs' relief will be doubled from £5 million to £10 million. Subject to conditions, this relief reduces the rate of tax to 10% on qualifying disposals of entrepreneurial businesses by individuals and certain trustees, with the excess taxed at the individual's marginal rate.

If before 6 April 2011, an individual has already reached the limit for entrepreneurs' relief, there will be no retrospective increase for disposals that were made before 6 April. Instead, the extra £5 million of relief will be available for future qualifying disposals.

There are no other changes to the rules or conditions relating to entrepreneurs' relief.

Corporation Tax cut

The main rate of corporation tax, currently 28%, will be reduced as follows:

  • for the financial year beginning 1 April 2011, the rate will be cut by 2% to 26%;
  • for the financial year beginning 1 April 2012, the rate will be cut by 1% to 25%;
  • for the financial year beginning 1 April 2013, the rate will be cut by 1% to 24%; and
  • for the financial year beginning 1 April 2014, the rate will be cut by 1% to 23%.

The ultimate rate of UK corporation tax will be the lowest in the G7.

The small profits rate of corporation tax, currently 21%, will be reduced to 20% for the financial year beginning 1 April 2011 (but is not expected to change thereafter).

Foreign Branches Profits Exemption

With effect for accounting periods commencing on or after the Royal Assent of the Finance Bill (expected in July 2011), UK resident companies will be able to elect for profits of all their foreign branches to be exempt from UK corporation tax.

Following consultation, the Chancellor has confirmed that life insurance companies will also be to benefit from this exemption.

Lower Taxes in Northern Ireland

The Government is consulting concerning introduction of lower corporation tax rates in Northern Ireland to respond to the Irish Republic's business tax regime.

50% Income Tax to be abolished

In his Budget speech, the Chancellor confirmed:

"I am clear that the 50 pence tax rate would do lasting damage to our economy if it were to become permanent. That is why I regard it as a temporary measure.... I've said before that now wouldn't be the right time to remove it, when we're asking others in our society on much lower incomes to make sacrifices. For we're all in this together."

Whilst no timescale for abolition has been indicated, the Chancellor has asked HM Revenue & Customs to monitor how much the 50% tax brings in. This information should give the Chancellor scope to replace 50% income tax with something less damaging to the UK economy but which raises a similar amount of tax.

Enterprise Zones established

Eleven new Enterprise Zones have been announced in England - in London, Birmingham / Solihull, Leeds, Liverpool, Greater Manchester, the Tees Valley, Tyneside, the Bristol area, the Black Country, Derbyshire / Nottinghamshire and Sheffield. Another ten Enterprise Zones in England will be announced in the Summer of 2010. There are also expected to be Enterprise Zones in Northern Ireland, Scotland and Wales after discussions with the respective devolved Governments.

Businesses in Enterprise Zones will obtain:

  • up to 100% discount on business rates for 5 years;
  • new superfast broadband; and
  • (for zones where there is a strong focus on manufacturing) enhanced capital allowances.

In return for radically reduced planning restrictions, local authorities will be allowed to keep all business rate growth in their Enterprise Zone for a period of at least 25 years to spend on development priorities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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